RSM Tenon: flying too high?

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The advertising slogan once boasted it was “flying high”, but this January RSM Tenon crashed in spectacular fashion

To the shock of the accountancy profession, RSM Tenon announced the resignation of chairman, Bob Morton, and much-fêted chief executive, Andy Raynor, followed by a £70.6m loss for the six months to 31 December 2011 and the restatement of its prior-year accounts.

Since then, the UK’s seventh largest accountancy firm has continued to bump along the runway, knocked by one setback after another. Adrian Martin, an RSM Tenon non-executive director who replaced Morton as chairman, resigned at the end of April, just three months into the role.

Accountancy firms have core competencies. RSM Tenon could have been a very successful firm if it had stuck to its core

Jeremy Newman

The firm has been rocked by management upheaval, including the departure of Mark Lucas, its national head of audit, tax and advisory, as well as a painful cost-cutting exercise involving a 10% headcount reduction. A potential sale of the firm also fell through earlier this year after the buyer pulled out. Now the latest blow, announced last week, is the widely anticipated decision of the Financial Reporting Council’s Accountancy and Actuarial Discipline Board (AADB) to investigate “certain members of the ICAEW” and RSM Tenon’s auditor, PwC.

A deal too far

The AADB’s investigation will focus on the preparation, approval and audit of RSM Tenon’s financial statements for the years ending 30 June 2010 and 2011. It will also concentrate on the financial information submitted in connection with the group’s admission to the main market of the London Stock Exchange in May 2010 and its acquisition of RSM Bentley Jennison in 2009. As the broad scope of the AADB’s investigation suggests, RSM Tenon’s problems appear to date back to that high-profile merger.

“The Bentley Jennison acquisition was probably a deal too far,” says Jeremy Newman, the former chairman of BDO International who acted as a consultant to RSM Tenon earlier this year. “I think they could have made the deal work if they had handled it differently but they didn’t have a clear strategy as to how they would integrate the business with their own business and what the enlarged business would look like.”

RSM Tenon’s status as a listed company contributed to the problem. As it was able to raise finance more easily than a partnership, this would have increased the temptation to overstretch itself and take on higher gearing. It paid £76.3m for Bentley Jennison, which is often considered too much by accounting sources, given that Bentley Jennison itself had followed an ambitious acquisition strategy in the years leading up to the merger and would probably have been burdened with considerable levels of debt.

The difference in ownership structure between RSM Tenon and Bentley Jennison, a limited liability partnership, also presented management issues when Bentley Jennison partners became directors of the enlarged firm. “Directors do not have the same sense of ownership that partners have,” observes Newman.

Flawed strategy

On top of this, once RSM Tenon started to struggle, its listed company status meant that its tribulations became very public, bringing with them the torrid glare of negative publicity.

Besides struggling to absorb Bentley Jennison’s people, RSM Tenon also failed to make the cost savings from the merger that it had anticipated. The problem was no doubt further compounded by the firm’s decision in June 2010 to buy three advisory offices, a recovery practice and a financial management business from failed fellow consolidator Vantis. Chris Merry, RSM Tenon’s new chief executive, who was appointed in February, acknowledged that the firm’s cost base got “too high”.

Meanwhile, RSM Tenon’s relentless acquisition strategy from its launch in 2000 had resulted in over £134m of goodwill sitting on its balance sheet, a considerable sum given that its market capitalisation in February 2012 was just £18.7m. The firm decided to address this by doing a one-off impairment charge of £60.7m, which made up most of the £70.6m loss that it announced in February. Other elements of the loss related to a settlement the firm reached with the Financial Services Authority in February 2010 over failings in its financial management service line and “significant” accounting errors in the prior-year accounts including, embarrassingly for an accountancy firm, accounting for a lease as an operating lease when it should have been accounted for as a finance lease.

[the investigation is a] “huge embarrassment for our profession”

Phil Shohet

These accounting errors, and the impact of the Bentley Jennison merger on RSM Tenon’s balance sheet, are the issues that the AADB is likely to focus on during the course of its investigation. Besides PwC, it is understood that ICAEW members associated with RSM Tenon are also being investigated. As the investigation involves the audit of a relatively small listed company of chartered accountants by the UK’s largest accountancy firm, it has inevitably attracted considerable press interest. Reputations are at stake and Phil Shohet, managing director of practice adviser Kato Consultancy, describes the investigation as a “huge embarrassment for our profession”. No wonder, then, a bun fight has ensued.

Earlier this year, RSM Tenon and PwC publicly fell out after the Big Four firm claimed that RSM Tenon had misled it during its audit work. PwC has said that it will be “co-operating fully with the AADB investigation” and “vigorously defending” its audits and other work carried out for the firm.

Lessons for us all

It seems there is a powerful lesson that other accountancy firms can learn from RSM Tenon’s misfortunes: don’t try to be something you’re not. “Stick to your knitting,” advises Newman. “Accountancy firms have core competencies. RSM Tenon could have been a very successful firm if it had stuck to its core competencies.”

He points out that although RSM Tenon appeared to compete with mid-tier rivals Grant Thornton and BDO in terms of size, in reality it lacked the listed clients, training and infrastructure to achieve this.

So far, 2012 has been an “annus horribilis” for RSM Tenon and it doesn’t look like the firm’s tribulations will end anytime soon. There is still much to be done to get it back on track and the firm has said that it will “fully co-operate” with the AADB’s investigation. But the outlook isn’t completely gloomy.

“If it makes the right strategic choices, there’s no reason why it shouldn’t be a reasonably successful business again,” says Newman.

What will happen next? Management buy-outs of individual offices or sale to another firm are typically among the options in these circumstances. But it may simply be that RSM Tenon, under the guidance of a focused management team, succeeds in trading through adversity. We will have a better understanding of when, and indeed if, RSM Tenon will fly high again when its year-end results are announced in October.


Sally Percy


4.27 (26 votes cast)

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  • Comment by Anonymous

    As a former client, I became alarmed on receipt of a solicitors letter threatening court action to recover unpaid fees of which I had no notice and which had been paid by deduction from my portfolio. With basic book-keeping so inept and CRM skills so lacking - even my Advisor had no idea of this "action" - I am so relieved to be an ex-client.

  • Comment by Mrs Ponzi

    It was akin to a pyramid scheme dependent on acquisitions to keep the cash flowing rather than genuine organic growth. None of the acquisitions were integrated with the top brass having a vested interest in hitting targets to collect their earn outs. It gives the whole profession a bad name and as usual it will be the employees who lose out at the end of the day.

  • Comment by Anonymous

    A testament to ego! Bentley Jennison was indigestible for RSM Tenon and was on the verge of being bust before being bought, having indulged in its own egotistical expansion buying other fatally flawed firms such as wbs in Yorkshire. Yet more evidence of the unhealthy attitude to gearing that has damaged our economy so badly.

  • Comment by Anonymous

    Interesting that a client thought that RSM Tenon were guilty of bullying. Spare a thought for their poor employees!!!

  • Comment by Mark O'Hara

    As FD of a small Sussex building contractor, I have had the misfortune of experiencing RSM Tenon's "expertise" at first hand. Their bullying tactics and incompetent handling of two sub-contractor insolvencies cost my company more than £10,000 in legal fees when we were obliged to defend ourselves against spurious claims. I for one would be delighted to see them crash and burn, hopefully saving other innocent parties from their particular brand of abuse.

  • Comment by Anonymous

    It was very difficult to tell from the inside who acquired who! The acquisition made a small number of people very wealthly and this will be at the expense of many people's livelyhoods.

  • Comment by Anonymous

    It will be interesting to see if certain former Board Directors repay their substantial bonuses paid to them, based upon previously stated profits.

  • Comment by D James

    Such basic strategic mistakes with big acquisitions undermine RSM Tenon's credibility as advisors. It's quite easy to look good if you are using other people's money to buy a big empire, but if they were that good they should have grown more organically.